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Jayant M Thakur
The 1997 amendment to the RBI Act has created severe anxiety in the minds of investment companies. When the Ordinance amending the Reserve Bank of India Act 1997 was issued in 1997, little was realised what the consequences would be for a very large number of non-banking financial companies ("NBFCs") which are investment companies. The basic intention of the amendment was to ensure that only registered NBFCs should carry on or commence business of NBFC such as leasing, hire-purchase, etc..
To ensure that this does not create a problem for existing companies, the amendment, which came into effect from 9th January 1997, required all NBFCs to apply for registration within six months, i.e., latest by 8th July 1997.
If an NBFC had not applied by that date, the company could not carry on the business for even one more day. However, once an existing NBFC applied for registration, there was no further need of actual registration for three years unless the application is itself rejected. Looking from one point ofview, one could argue that the period of six months was more than adequate for submitting the application. The Reserve Bank of India had also taken efforts to publicise this by giving notices in newspapers.
However, what was not realised by the public and, perhaps, by also RBI, is that a very large number of investment companies which, because of the peculiar definition of NBFC as per the RBI Act, were also NBFCs. In other words, these were also required to apply for registration by that last date failing which they could not continue their business. Admittedly, these companies are merely shell companies incorporated merely for convenience and particularly in the past for tax benefits. These do not carry on any NBFC business - or for that matter any business at all in the real sense of the term. Nor, as a rule, do they take any deposits, public or private.
In fact, the thrust of the amendment was towards those companies which accept deposits since the intention was protection of depositors. However, asstated earlier, because of the unduly wide definition of the term NBFC, even such companies which has created virtually a panic. Since such companies do not carry any activity except receiving dividends, attention is not paid to them except a few months after the yearend to prepare accounts for statutory and tax purposes. However, by such time, the last date of 8th July 1997 had already passed. The date has not been extended and applications filed after that date have been rejected with a terse letter requiring the NBFC to close down its business.
Note that a company which has not made such an application simply cannot "carry on the business". What does this mean? First of all, what is the "business" of such a company. Is it buying and selling of securities? Is it holding of such investments? Is it receipt of dividends? Which of these activities cannot be carried on?
Note that the punishment for non-compliance is hefty fine (which also includes a fine of upto Rs. 25,000 per day of continuing offence) andimprisonment. Hence, no sooner than 8th July 1997 has passed, each of such companies (and such companies, as per public knowledge, run into tens of thousands) faces such punishment. Further, how does one discontinue to carry on the business? As is apparent, such pure investment cmpanies typically hold the investments for years and earn dividends/interest. Does this mean that from 9th July 1997, they cannot buy or sell securities? Or does this mean that they cannot even receive dividends/interest? Or, since even holding of such investments is deemed to be business, they should have sold all their investments by 8th July 1998? Where do they keep the surplus funds generated? Do the NBFCs have to wind upor they can commence some other business? What about the defaults in the period from 9th July 1997 till the time the "business" is stopped?
These all questions create anxiety in the minds of the management of NBFCs. The official stance of the Reserve Bank of India is that such companies should close down andalso face punishment. In fact, the Directions to Auditors issued by RBI in January 1998 specifically require them to report whether the company has applied for registration and, if not, they should report directly to RBI. The Shah Committee, which had mooted the proposal to register NBFCs in its report, had specifically stated that the requirement of registration should be applicable only to companies accepting deposits from the public. Unfortunately, when this suggestion was made law, the requirement was extended to all companies resulting into thousands of companies needlessly coming its fold. If one sees the later directions of RBI on acceptance of deposits and on prudential norms, it is apparent that companies which do not accept deposits and particularly such basic investment companies have been specifically excluded from their purview.
It is submitted that the requirement of registration should be made inapplicable to all such investments companies which do not accept public deposits. This also seemsto be the intention of the lawmakers, as is evident from the Shah Committee Report and the subsequent Directions of RBI discussed earlier. Of course, if any such investment company accepts public deposits without registration, they should be subject to appropriate punishment. A clarification by RBI on these crucial issues followed by suitable legislative amendment will remove the uncertainty and apprehension and will also bring law in line with the intention.
(The author is Mumbai based Chartered Accountant)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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